**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 
| **x** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2009**

** **

**or**

 
| **o** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from                to                **

 

**Commissionfile number****         ****1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

| **Bermuda**                   | ** ** | **98-0223493**      |
|-------------------------------|------------|---------------------|
| (State or other  jurisdiction |       | (I.R.S. Employer    |
| of incorporation or           |       | Identification No.) |
| organization)                 |       |                |

 

| **22 Victoria Street**                    | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **P.O. Box HM 1179**                 | ** ** | ** ** |
| **Hamilton HMEX, Bermuda**                | ** ** | ** ** |
| (Address of principal  executive offices) |       | (Zip Code) |

 

**441–295–2244**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No  ̈

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes  ̈No  ̈

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  (See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act).

 

| Large Accelerated Filer x     |   | Accelerated Filer  ̈         |
|------------------------------------|--------|---------------------------------------|
|                               |   |                                  |
| Non-Accelerated Filer   ̈ |   | Smaller Reporting Company  ̈ |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes  ̈  No x

 

As of May 4,2009, 76,834,500 Class A common shares and 18,044,478 Class B common shares ofOrient-Express Hotels Ltd. were outstanding. All of the Class B shares areowned by a subsidiary of Orient-Express Hotels Ltd.

 

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** **

**PART I– FINANCIAL INFORMATION**

 

**ITEM 1.  Financial Statements**

 

**Orient-Express Hotels Ltd. and Subsidiaries**

 

**Condensed Consolidated Balance Sheets (unaudited)**

 
| ** **                                                                               |   | **March 31,  2009**   | ** **      | **December 31,  2008** |   |
|------------------------------------------------------------------------------------------|--------|----------------------------|-----------------|-----------------------------|--------|
| ** **                                                                               |   | **(Dollars in thousands)** |            |
| **Assets**                                                                               |   |                       |            |                        |   |
| Cash  and cash equivalents                                                               |   | $                          | 41,565          |                        | $      | 65,764 |   |
| Restricted  cash                                                                         |   | 13,263                     |            | 13,224                      |   |
| Accounts  receivable, net of allowances of $933 and $1,105                               |   | 46,454                     |            | 48,568                      |   |
| Due  from related parties                                                                |   | 12,208                     |            | 10,013                      |   |
| Prepaid  expenses and other                                                              |   | 24,269                     |            | 19,916                      |   |
| Inventories                                                                              |   | 43,397                     |            | 45,841                      |   |
| Assets  of discontinued operations held for sale                                         |   | 32,483                     |            | 35,978                      |   |
| Real  estate assets                                                                      |   | 91,646                     |            | 83,983                      |   |
| Total  current assets                                                                    |   | 305,285                    |            | 323,287                     |   |
|                                                                                     |   |                       |            |                        |   |
| Property,  plant and equipment, net of accumulated depreciation of $259,980 and $257,346 |   | 1,435,521                  |            | 1,464,095                   |   |
| Investments                                                                              |   | 65,828                     |            | 67,464                      |   |
| Goodwill                                                                                 |   | 141,909                    |            | 154,054                     |   |
| Other  intangible assets                                                                 |   | 19,455                     |            | 20,255                      |   |
| Other  assets                                                                            |   | 41,319                     |            | 39,978                      |   |
|                                                                                     |   | $                          |  2,009,317 |                        | $      | 2,069,133 |   |
|                                                                                     |   |                       |            |                        |   |
| **Liabilities and Equity**                                                               |   |                       |            |                        |   |
| Working  capital facilities                                                              |   | $                          | 59,469          |                        | $      | 54,179 |   |
| Accounts  payable                                                                        |   | 20,399                     |            | 24,563                      |   |
| Accrued  liabilities                                                                     |   | 74,553                     |            | 74,522                      |   |
| Deferred  revenue                                                                        |   | 67,802                     |            | 56,731                      |   |
| Liabilities  of discontinued operations held for sale                                    |   | 3,336                      |            | 4,781                       |   |
| Current  portion of long-term debt and capital leases                                    |   | 237,390                    |            | 139,968                     |   |
| Total  current liabilities                                                               |   | 462,949                    |            | 354,744                     |   |
|                                                                                     |   |                       |            |                        |   |
| Long-term  debt and obligations under capital leases                                     |   | 606,384                    |            | 720,155                     |   |
| Liability  for pension benefit                                                           |   | 7,356                      |            | 7,421                       |   |
| Other  liabilities                                                                       |   | 20,206                     |            | 22,562                      |   |
| Deferred  income taxes                                                                   |   | 154,050                    |            | 168,589                     |   |
| Liability  for uncertain tax positions                                                   |   | 11,290                     |            | 11,493                      |   |
|                                                                                     |   | 1,262,235                  |            | 1,284,964                   |   |
|                                                                                     |   |                       |            |                        |   |
| Commitments  and contingencies                                                           |   |                       |            |                        |   |
|                                                                                     |   |                       |            |                        |   |
| Equity                                                                                   |   |                       |            |                        |   |
| Shareholders’  equity:                                                              |   |                       |            |                        |   |
| Preferred  shares $0.01 par value (30,000,000 shares authorized, issued nil)             |   | —                     |            | —                      |   |
| Class A  common shares $0.01 par value (120,000,000 shares authorized):             |   |                       |            |                        |   |
| Issued  – 50,959,500                                                                |   | 510                        |            | 510                         |   |
| Class B  common shares $0.01 par value (120,000,000 shares authorized):             |   |                       |            |                        |   |
| Issued  – 18,044,478                                                                |   | 181                        |            | 181                         |   |
| Additional  paid-in capital                                                              |   | 571,526                    |            | 570,727                     |   |
| Retained  earnings                                                                       |   | 256,932                    |            | 271,571                     |   |
| Accumulated  other comprehensive income                                                  |   | (83,610                    | )               | (60,210                     | )      |
| Less:  reduction due to class B common shares owned by a subsidiary – 18,044,478    |   | (181                       | )               | (181                        | )      |
| Total  shareholders’ equity                                                         |   | 745,358                    |            | 782,598                     |   |
| Non-controlling  interests                                                               |   | 1,724                      |            | 1,571                       |   |
| Total  equity                                                                            |   | 747,082                    |            | 784,169                     |   |
|                                                                                     |   | $                          |  2,009,317 |                        | $      | 2,069,133 |   |

 

See notes to condensed consolidated financial statements.

 

2

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** **

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three months ended March 31,**                                  | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                                   |       |                                                 |       |     |       |
| Revenue                                                                |       | $                                                    | 89,412     |     | $          | 114,680 |   |
|                                                                   |       |                                                 |       |     |       |
| Expenses:                                                              |       |                                                 |       |     |       |
| Depreciation  and amortization                                         |       | 10,114                                               |       | 10,284   |       |
| Operating                                                              |       | 45,197                                               |       | 59,693   |       |
| Selling,  general and administrative                                   |       | 37,413                                               |       | 43,818   |       |
| Impairment  of goodwill                                                |       | 7,048                                                |       | —   |       |
| Total  expenses                                                        |       | 99,772                                               |       | 113,795  |       |
|                                                                   |       |                                                 |       |     |       |
| (Losses)/earnings  from operations                                     |       | (10,360                                              | )          | 885      |       |
|                                                                   |       |                                                 |       |     |       |
| Interest  expense, net                                                 |       | (9,863                                               | )          | (12,929  | )          |
| Foreign  currency, net                                                 |       | (3,838                                               | )          | 2,045    |       |
| Net  finance costs                                                     |       | (13,701                                              | )          | (10,884  | )          |
|                                                                   |       |                                                 |       |     |       |
| Losses  before income taxes and earnings from unconsolidated companies |       | (24,061                                              | )          | (9,999   | )          |
|                                                                   |       |                                                 |       |     |       |
| Benefit  from income taxes                                             |       | 9,377                                                |       | 3,557    |       |
|                                                                   |       |                                                 |       |     |       |
| Losses  before earnings from unconsolidated companies                  |       | (14,684                                              | )          | (6,442   | )          |
|                                                                   |       |                                                 |       |     |       |
| Earnings  from unconsolidated companies, net of tax of $432 and $1,181 |       | 1,119                                                |       | 4,067    |       |
|                                                                   |       |                                                 |       |     |       |
| Net  losses from continuing operations                                 |       | (13,565                                              | )          | (2,375   | )          |
|                                                                   |       |                                                 |       |     |       |
| Losses  from discontinued operations, net of tax                       |       | (1,074                                               | )          | (1,963   | )          |
|                                                                   |       |                                                 |       |     |       |
| Net  losses                                                            |       | $                                                    | (14,639    | )        | $          | (4,338 | ) |
|                                                                   |       |                                                 |       |     |       |
| Basic  net losses per share:                                           |       |                                                 |       |     |       |
| Net  losses from continuing operations                                 |       | $                                                    | (0.27      | )        | $          | (0.06 | ) |
| Net  losses from discontinued operations                               |       | (0.02                                                | )          | (0.04    | )          |
| Net  losses                                                            |       | $                                                    | (0.29      | )        | $          | (0.10 | ) |
|                                                                   |       |                                                 |       |     |       |
| Diluted  net losses per share:                                         |       |                                                 |       |     |       |
| Net  losses from continuing operations                                 |       | $                                                    | (0.27      | )        | $          | (0.06 | ) |
| Net  losses from discontinued operations                               |       | (0.02                                                | )          | (0.04    | )          |
| Net  losses                                                            |       | $                                                    | (0.29      | )        | $          | (0.10 | ) |
|                                                                   |       |                                                 |       |     |       |
| Dividends  per share                                                   |       | $                                                    | —     |     | $          | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

 

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Cash Flows (unaudited)**

 
| **Three months ended March 31,**                                                                                  | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                                                                 |       |                       |       |     |       |
| Net  losses from continuing operations                                                                                 |       | $                          | (13,565    | )        | $          | (2,375 | ) |
| Adjustments  to reconcile net losses to net cash used in operating activities:                                         |       |                       |       |     |       |
| Depreciation  and amortization                                                                                         |       | 10,114                     |       | 10,284   |       |
| Amortization  and write-off of finance costs                                                                           |       | 822                        |       | 871      |       |
| Impairment  losses                                                                                                     |       | 7,048                      |       | —   |       |
| Undistributed  earnings of affiliates                                                                                  |       | (1,551                     | )          | (2,244   | )          |
| Stock-based  compensation                                                                                              |       | 799                        |       | 838      |       |
| Change  in deferred tax                                                                                                |       | (12,311                    | )          | (5,859   | )          |
| Losses  from disposals of fixed assets                                                                                 |       | 161                        |       | 54       |       |
| Unrealized  foreign exchange loss/(gain)                                                                               |       | 4,169                      |       | (1,134   | )          |
| Other  non-cash items                                                                                                  |       | 970                        |       | 1,047    |       |
| Change  in assets and liabilities net of effects from acquisition of subsidiaries:                                     |       |                       |       |     |       |
| Increase  in receivables, prepaid expenses and other                                                                   |       | (5,021                     | )          | (16,002  | )          |
| Decrease/(increase)  in inventories                                                                                    |       | 1,099                      |       | (1,728   | )          |
| Increase  in real estate assets held for sale                                                                          |       | (7,663                     | )          | (8,358   | )          |
| Increase  in payables, accrued liabilities and deferred revenue                                                        |       | 4,894                      |       | 21,582   |       |
| Dividends  received from unconsolidated companies                                                                      |       | 1,064                      |       | 3,780    |       |
|                                                                                                                   |       |                       |       |     |       |
| Total  adjustments                                                                                                     |       | 4,594                      |       | 3,131    |       |
|                                                                                                                   |       |                       |       |     |       |
| Net  cash (used in)/provided by operating activities from continuing operations                                        |       | (8,971                     | )          | 756      |       |
| Net  cash used in operating activities from discontinued operations                                                    |       | (1,722                     | )          | (1,702   | )          |
|                                                                                                                   |       |                       |       |     |       |
| Net  cash used in operating activities                                                                                 |       | (10,693                    | )          | (946     | )          |
|                                                                                                                   |       |                       |       |     |       |
| Cash  flows from investing activities:                                                                                 |       |                       |       |     |       |
| Capital  expenditures                                                                                                  |       | (21,973                    | )          | (20,790  | )          |
| Acquisitions  and investments, net of cash acquired                                                                    |       | (28                        | )          | (2,099   | )          |
| Increase  in restricted cash                                                                                           |       | (39                        | )          | (2,619   | )          |
|                                                                                                                   |       |                       |       |     |       |
| Net  cash used in investing activities from continuing operations                                                      |       | (22,040                    | )          | (25,508  | )          |
| Net  cash used in investing activities from discontinued operations                                                    |       | (76                        | )          | (364     | )          |
|                                                                                                                   |       |                       |       |     |       |
| Net  cash used in investing activities                                                                                 |       | (22,116                    | )          | (25,872  | )          |
|                                                                                                                   |       |                       |       |     |       |
| Cash  flows from financing activities:                                                                                 |       |                       |       |     |       |
| Net  proceeds from working capital facilities and redrawable loans                                                     |       | 16,550                     |       | 42,455   |       |
| Stock  options exercised                                                                                               |       | —                     |       | 88       |       |
| Issuance  of long-term debt                                                                                            |       | 35                         |       | 117      |       |
| Principal  payments under long-term debt                                                                               |       | (7,360                     | )          | (9,229   | )          |
| Payment  of common share dividends                                                                                     |       | —                     |       | (1,061   | )          |
|                                                                                                                   |       |                       |       |     |       |
| Net  cash provided by financing activities                                                                             |       | 9,225                      |       | 32,370   |       |
|                                                                                                                   |       |                       |       |     |       |
| Effect  of exchange rate changes on cash and cash equivalents                                                          |       | (673                       | )          | (295     | )          |
|                                                                                                                   |       |                       |       |     |       |
| Net  (decrease)/increase in cash and cash equivalents                                                                  |       | (24,257                    | )          | 5,257    |       |
|                                                                                                                   |       |                       |       |     |       |
| Cash  and cash equivalents at beginning of period (includes $120 (2009), $360  (2008) of discontinued operations cash) |       | 65,884                     |       | 90,925   |       |
|                                                                                                                   |       |                       |       |     |       |
| Cash  and cash equivalents at end of period (includes $62 (2009), $286 (2008) of  discontinued operations cash)        |       | $                          | 41,627     |     | $          | 96,182 |   |

 

See notes to condensed consolidated financial statements.

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Equity (unaudited)**

 
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **(Dollars in thousands)**    | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/  (Loss)** | ** ** | **Non-  controlling   Interests** | ** ** |
| ** **                    | ** ** | ** **                           | ** ** | ** **                                      | ** ** | ** **                                      | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **                                           | ** ** | ** **                               | ** ** | ** **                                | ** ** | ** **                        | ** ** |
| Balance, January 1, 2008 |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 515,307                                              |       | $                                        | 302,369    |                                      | $          | 30,431                            |       | $      | (181   | )      |   |   | $      | 1,780  |   |
| Stock-based compensation      |       | —                               |       | —                                          |       | —                                          |       | 838                              |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                            |       |
| Stock options exercised       |       | —                               |       | —                                          |       | —                                          |       | 88                               |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                            |       |
| Dividends on common shares    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (1,061                 | )          | —                                               |       | —                                   |       |                                      |       | —                            |       |
| Comprehensive loss:           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                              |       |
| Net losses                    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (4,338                 | )          | —                                               |       | —                                   |       | $                                         | (4,338     | )                                 | 196        |   |
| Other comprehensive income    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 2,362                                                |       | —                                   |       | 2,362                                     |       | 1                                 |       |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (1,976     | )                                 |       |   |
| Balance, March 31, 2008  |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 516,233                                              |       | $                                        | 296,970    |                                      | $          | 32,793                            |       | $      | (181   | )      |   |   | $      | 1,977  |   |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                              |       |
| Balance, January 1, 2009 |       | $                                    | —     |                                            | $          | 510                                             |       | $                                | 181        |                   | $          | 570,727                                              |       | $                                        | 271,571    |                                      | $          | (60,210                           | )          | $      | (181   | )      |   |   | $      | 1,571  |   |
| Stock-based compensation      |       | —                               |       | —                                          |       | —                                          |       | 799                              |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                            |       |
| Comprehensive loss:           |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                              |       |
| Net losses                    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (14,639                | )          | —                                               |       | —                                   |       | $                                         | (14,639    | )                                 | 151        |   |
| Other comprehensive income    |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | (23,400                                              | )          | —                                   |       | (23,400                                   | )          | 2                                 |       |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (38,039    | )                                 |       |   |
| Balance, March 31, 2009  |       | $                                    | —     |                                            | $          | 510                                             |       | $                                | 181        |                   | $          | 571,526                                              |       | $                                        | 256,932    |                                      | $          | (83,610                           | )          | $      | (181   | )      |   |   | $      | 1,724  |   |
|                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
|                               |            |                                      |            |                                                 |            |                                                 |            |                                  |            |                        |            |                                                      |            |                                          |            |                                           |            |                                   |            |        |        |        |        |        |        |        |        |        |        |  |

 

Seenotes to condensed consolidated financial statements.

 

5

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**Orient-Express Hotels Ltd. and Subsidiaries**

 

**Notes to Condensed Consolidated Financial Statements**

 

**1.             Basis of financialstatement presentation**

 

Inthis report Orient-Express Hotels Ltd. is referred to as the “Company”, and theCompany and its subsidiaries are referred to collectively as “OEH”.

 

“FASB”means Financial Accounting Standards Board and “APB” means AccountingPrinciples Board, the FASB’s predecessor. “SFAS” means Statement of FinancialAccounting Standards of the FASB, and “FIN,” “EITF” or “FSP” means anaccounting interpretation of the FASB*.*

 

*(a) **Accounting policies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant to the rules and regulations of the U.S. Securities and ExchangeCommission for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements.  In the opinion ofthe management of the Company, all adjustments (consisting of normal recurringadjustments) necessary for a fair presentation of financial position, operatingresults and cash flows have been included in the statements.  Interim results are not necessarilyindicative of results that may be expected for the year ending December 31,2009.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s periodic filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.  See Note 1 to the consolidated financialstatements in the 2008 Form 10-K for additional information regardingsignificant accounting policies.

 

Theaccounting policies used in preparing these financial statements are the sameas those applied in the prior year, except for the implementation of SFAS No. 161,SFAS No. 160, SFAS No. 141(R), FSP 142-3, and SFAS No. 157 fornonfinancial assets and liabilities as deferred by FSP 157-2, effective January 1,2009.

 

*SFAS No. 161*

 

SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities - an amendment of FASB Statement No. 133”,**amends and expands the disclosure requirements of SFAS No. 133with the intent to provide users of financial statements with an 

 

6

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enhanced understanding of: (a) how and why anentity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS No. 161 requires qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about the fair valueof and gains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative instruments.

 

As required by SFAS No. 133, OEH records allderivatives on the balance sheet at fair value. The accounting for changes inthe fair value of derivatives depends on the intended use of the derivative,whether OEH has elected to designate a derivative in a hedging relationship andapply hedge accounting and whether the hedging relationship has satisfied thecriteria necessary to apply hedge accounting. Derivatives designated andqualifying as a hedge of the exposure to variability in expected future cashflows, or other types of forecast transactions, are considered cash flowhedges. Derivatives may also be designated as hedges of the foreign currencyexposure of a net investment in a foreign operation. Hedge accounting generallyprovides for the matching of the timing of gain or loss recognition on thehedging instrument with the recognition of the changes in the fair value of thehedged asset or liability that are attributable to the hedged forecasttransactions in a cash flow hedge. OEH may enter into derivative contracts thatare intended to economically hedge certain of its risks, even though hedgeaccounting does not apply or OEH elects not to apply hedge accounting underSFAS No. 133.

 

*SFAS No. 160*

 

EffectiveJanuary 1, 2009, OEH has implemented SFAS No. 160, “Non-ControllingInterests in Consolidated Financial Statements – an amendment of ARB No. 51”.Non-controlling interests have been classified as a component of equity for allperiods presented and the statements of consolidated equity have been amendedaccordingly. No further disclosures have been made as the impact on thestatements of consolidated operations from the non-controlling interests is notdeemed material.

 

*SFAS No. 141(R),FSP 142-3 and SFAS No. 157 for nonfinancial assets and liabilities*

 

Theimplementation of SFAS No. 141(R), “Business Combinations,” FSP 142-3,“Determination of the Useful Life of Intangible Assets,” and SFAS No. 157,“Fair Value Measurements” for nonfinancial assets and liabilities, has notresulted in any material impact to the financial statements as of March 31,2009 and for the three months then ended.

 

7

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*(b) Netlosses per share*

 

The number of shares used in computing basicand diluted losses per share was as follows (in thousands):

 
| **Three months ended March 31,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Basic                                 |       | 50,960   |       | 42,466   |       |
| Effect of dilution                    |       | —   |       | —   |       |
| Diluted                               |       | 50,960   |       | 42,466   |       |

 

Forthe three months ended March 31, 2009 and 2008, all share options andshare-based awards were excluded from the calculation of the diluted weightedaverage number of shares because OEH made a net loss in both periods and theeffect of their inclusion would be anti-dilative.

 

Thenumber of share options and share-based awards excluded was as follows:

 
| **Three months ended March 31,** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|---------------------------------------|------------|-----------|------------|----------|------------|
|                                  |       |      |       |     |       |
| Share options                         |       | 995,950   |       | 585,750  |       |
| Share-based awards                    |       | 500,000   |       | 59,965   |       |
|                                  |       | 1,495,950 |       | 645,715  |       |

 

*(c) Earnings from unconsolidated companies*

 

Earningsfrom unconsolidated companies include OEH’s share of the net earnings of itsequity investments as well as interest income related to loans and advances tothe equity investees. This interest income amounted to $nil and $3,004,000 forthe three months ended March 31, 2009 and 2008, respectively. See Note 3regarding consolidation of Charleston Center LLC effective December 31,2008.

 

****2.             Discontinued operations****

 

****Duringthe fourth quarter of 2007, OEH decided to sell its investment in Bora BoraLagoon Resort.  Accordingly, the resultsof the hotel have been presented as a discontinued operation for all theinterim periods presented.****

 

****Summarizedoperating results of the hotel are as follows (dollars in thousands):****

 

8

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| ****Three  months ended March 31,****                 | **** **** | ****2009****   | **** **** | ****2008****   | **** **** |
|------------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                             | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                            | **** **** | ****$****      | ****701****    | **** **** | ****$****      | ****1,611**** | **** **** |
| ****Net (loss) from************discontinued operations**** | **** **** | ****$****      | ****(1,074**** | ****)****      | ****$****      | ****(1,963**** | ****)**** |

 

****Assetsand liabilities of the hotel have been classified as held for sale andconsisted of the following (dollars in thousands):****

**** ****
| **** ****                                                        | **** **** | ****March 31,********2009**** | **** **** | ****December 31,********2008**** | **** **** |
|-----------------------------------------------------------------------|----------------|------------------------------------|----------------|---------------------------------------|----------------|
| **** ****                                                        | **** **** | **** ****                     | **** **** | **** ****                        | **** **** |
| ****Current assets****                                                | **** **** | ****$****                          | ****1,457****  | **** ****                        | ****$****      | ****2,202**** | **** **** |
| ****Other assets****                                                  | **** **** | ****92****                         | **** **** | ****97****                            | **** **** |
| ****Property, plant and equipment,************net of depreciation**** | **** **** | ****29,037****                     | **** **** | ****31,510****                        | **** **** |
| ****Goodwill****                                                      | **** **** | ****1,897****                      | **** **** | ****2,169****                         | **** **** |
| ****Total assets held for sale****                                    | **** **** | ****$****                          | ****32,483**** | **** ****                        | ****$****      | ****35,978**** | **** **** |
| ****Liabilities held for sale****                                     | **** **** | ****$****                          | ****(3,336**** | ****)****                             | ****$****      | ****(4,781**** | ****)**** |

 

****3.********                                     ********Consolidationof variable interest entity – Charleston Place Hotel****

 

****OEH holdsa 19.9% equity investment in Charleston Center LLC, owner of Charleston PlaceHotel.  It has also made a number ofloans to the hotel.  On evaluating itsvarious variable interests in the hotel at December 31, 2008, OEHconcluded that the hotel no longer qualified for certain scope exemptions underFIN 46(R), “Consolidation of Variable Interest Entities”****, because OEH’sshare of loans provided to the hotel had increased and OEH provided a majorityof subordinated financial support.****  OEH furtherconcluded that OEH is the primary beneficiary of the variable interest entityas defined in FIN 46(R) ****because it is expectedto absorb a majority of the entity’s residual gains or losses based on thecurrent organizational structure.  OEHhas****consolidated theentity effective December 31, 2008. Previously the entity had beenaccounted for under the equity method of accounting.****

 

****Theresults of operations of Charleston Place Hotel have been included in theconsolidated financial statements of OEH from January 1, 2009 and, accordingly,any intercompany transactions have been eliminated from that date forward.****

 

****Theassets and liabilities of Charleston Center LLC that were consolidated into thefinancial statements at their fair value as at December 31, 2008 were asfollows (dollars in thousands):****

 

9

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| ** **                                                 | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | ** **                  | ** ** |
| Current assets                                             |       | $                           | 4,937      |   |
| Property, plant and equipment                              |       | 196,650                     |       |
| Other assets                                               |       | 1,824                       |       |
| Goodwill                                                   |       | 40,395                      |       |
| Total assets                                               |       | $                           | 243,806    |   |
|                                                       |       |                        |       |
| Current liabilities                                        |       | $                           | 5,373      |   |
| Third party debt                                           |       | 79,626                      |       |
| Deferred income taxes                                      |       | 64,100                      |       |
| Other liabilities                                          |       | 12,306                      |       |
| Total liabilities before amounts payable to OEH of $97,000 |       | $                           | 161,405    |   |

 

****Thethird-party debt of Charleston Center LLC is non-recourse to its members, includingOEH, and the hotel’s separate assets and liabilities are not available to paythe debts of OEH and do not constitute obligations of OEH.****

 

**4.             Investments**

 

Summarizedfinancial data for OEH’s unconsolidated companies for the periods during whichthe investments were held by OEH are as follows (dollars in thousands):

 
| ** **                                      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets                                  |       | $                        | 57,756     |                        | $          | 55,877 |   |
| Property, plant and equipment, net              |       | 265,188                  |       | 266,461                     |       |
| Other assets                                    |       | 44,053                   |       | 47,084                      |       |
| Total assets                                    |       | $                        | 366,997    |                        | $          | 369,422 |   |
|                                            |       |                     |       |                        |       |
| Current liabilities                             |       | $                        | 36,660     |                        | $          | 30,293 |   |
| Long-term debt                                  |       | 161,165                  |       | 165,202                     |       |
| Other liabilities                               |       | 7,307                    |       | 4,744                       |       |
| Total shareholders’ equity                 |       | 161,865                  |       | 169,183                     |       |
| Total liabilities and shareholders’ equity |       | $                        | 366,997    |                        | $          | 369,422 |   |

 

10

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| **Three months ended March 31**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Revenue                                           |       | $        | 28,450     |     | $          | 50,080 |   |
| Earnings from operations before net finance costs |       | $        | 6,004      |     | $          | 10,386 |   |
| Net earnings/(losses)                             |       | $        | 2,811      |     | $          | 2,369 |   |

 

CharlestonCenter LLC has been consolidated into the financial statements of OEH witheffect from December 31, 2008. The summarized profit and loss accountinformation presented above includes the earnings of this hotel for the threemonths ended March 31, 2008 but not the three months ended March 31,2009.

 

**5.             Property, plant andequipment**

 

Themajor classes of property, plant and equipment are as follows (dollars inthousands):

 
| ** **                              | ** ** | **March 31,  2009** | ** **      | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|--------------------------|-----------------|-----------------------------|------------|
| ** **                              | ** ** | ** **               | ** **      | ** **                  | ** ** |
| Land and buildings                      |       | $                        | 1,273,008       |                        | $          | 1,290,322 |   |
| Machinery and equipment                 |       | 180,300                  |            | 200,252                     |       |
| Fixtures, fittings and office equipment |       | 229,080                  |            | 217,644                     |       |
| River cruiseship and canalboats         |       | 13,113                   |            | 13,223                      |       |
|                                    |       | 1,695,501                |            | 1,721,441                   |       |
| Less: accumulated depreciation          |       | (259,980                 | )               | (257,346                    | )          |
|                                    |       | $                        |  1,435,521 |                        | $          | 1,464,095 |   |

 

Themajor classes of assets under capital leases included above are as follows(dollars in thousands):

 
| ** **                              | ** ** | **March 31,  2009** | ** **   | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|--------------------------|--------------|-----------------------------|------------|
| ** **                              | ** ** | ** **               | ** **   | ** **                  | ** ** |
| Freehold and leased land and buildings  |       | $                        | 14,436       |                        | $          | 15,535 |   |
| Machinery and equipment                 |       | 2,612                    |         | 2,630                       |       |
| Fixtures, fittings and office equipment |       | 3,321                    |         | 3,538                       |       |
|                                    |       | 20,369                   |         | 21,703                      |       |
| Less: accumulated depreciation          |       | (4,680                   | )            | (4,784                      | )          |
|                                    |       | $                        |  15,689 |                        | $          | 16,919 |   |

 

11

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**6.             Goodwill**

 

Thechanges in the carrying amount of goodwill for the three months ended March 31,2009 are as follows (dollars in thousands):

 
| ** **                                       | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------|------------|
|                                             |       |                               |       |                           |       |      |       |
| Balance as of January 1, 2009               |       | $                                  | 146,381    |                           | $          | 7,673     |       | $ | 154,054 |   |
| Goodwill impairment (from continuing operations) |       | (6,835                             | )          | —                         |       | (6,835    | )          |
| Foreign currency translation adjustment          |       | (5,294                             | )          | (16                            | )          | (5,310    | )          |
| Balance as at March 31, 2009                |       | $                                  | 134,252    |                           | $          | 7,657     |       | $ | 141,909 |   |

 

OEH’sgoodwill impairment testing is performed in two steps, first, the determinationof impairment based upon the fair value of each reporting unit as compared withits carrying value and, second, if there is an implied impairment, themeasurement of the amount of the impairment loss is determined by comparing theimplied fair value of goodwill with the carrying value of the goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fairvalue, the goodwill is deemed to be impaired and is written down to the extentof the difference.

 

Thedetermination of impairment incorporates various assumptions and uncertaintiesthat OEH believes are reasonable and supportable considering all availableevidence, such as the future cash flows of the business, future growth ratesand the related discount rate. However, these assumptions and uncertaintiesare, by their very nature, highly judgmental.  If the assumptions are notmet, OEH may be required to recognize additional goodwill impairment losses.

 

Duringthe three months ended March 31, 2009, OEH completed its 2008 impairmentanalysis and identified a non-cash goodwill impairment charge of $6,835,000 inaddition to the estimated impairment loss included in its annual December 31,2008 results, as follows (dollars in thousands):

 
| Miraflores Park          |   | $      | 3,208       |   |
|--------------------------|--------|--------|-------------|--------|
| Casa de Sierra Nevada    |   | 2,805  |        |
| Observatory Hotel        |   | 274    |        |
| Lilianfels Blue Mountain |   | 548    |        |
|                     |   |   |        |
|                     |   | $      |  6,835 |   |

 

Inaddition, an impairment charge of $213,000 was made in respect of tradenamesowned by the Casa de Sierra Nevada, bringing the total impairment charge to$7,048,000 in the three months ended March 31, 2009.

 

12

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| **7.** | **Other  intangible assets** |
|--------|------------------------------|
|   | (Dollars  in thousands)      |

 
| ** **                       | ** ** | **March 31, 2009** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| **Amortized intangible  assets** | ** ** | **Carrying  amount**    | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| ** **                       | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Favorable lease                  |       | $                       | 11,515     |   | $ | 837 |   | $ | 10,678 |   |
| Internet sites                   |       | 1,858                   |       | 182 |   | 1,676 |   |
| Total                            |       | $                       | 13,373     |   | $ | 1,019 |   | $ | 12,354 |   |
|                             |       |                    |       |   |   |   |   |
| Unamortized intangible assets    |       |                    |       |   |   |   |   |
| Tradename                        |       |                    |       |   |   | $ | 7,101 |   |

 

Favorablelease intangible assets are amortized over the term of the lease, which is upto 50 years, and internet sites are amortized over ten years.

 

Amortization expense for the three months ended March 31,2009 was $75,000 (2008 – $137,000). Estimated amortization expense for each of the years ended December 31,2009 to December 31, 2013 is $340,000.

 

**8.             Long-term debt andobligations under capital lease**

 

Long-term debt consists ofthe following (dollars in thousands):

 
| ** **                                                                                                                                                                                                 | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | ** **               | ** **    | ** **                  | ** ** |
| Loans from banks collateralized by property, plant and equipment  payable over periods of 1 to 11 years, with a weighted average interest rate  of 4.16% and 5.05%, respectively, primarily based on LIBOR |       | $                        | 830,958       |                        | $          | 846,534 |   |
| Obligations under capital lease                                                                                                                                                                            |       | 12,816                   |          | 13,589                      |       |
|                                                                                                                                                                                                       |       | 843,774                  |          | 860,123                     |       |
| Less: current portion                                                                                                                                                                                      |       | 237,390                  |          | 139,968                     |       |
|                                                                                                                                                                                                       |       | $                        |  606,384 |                        | $          | 720,155 |   |

 

Long-termdebt at March 31, 2009 includes $79,600,000 of debt at Charleston CenterLLC. This debt is non-recourse to OEH, and the separate assets and liabilitiesof Charleston Place Hotel are not available to pay the debts of OEH and do notconstitute obligations of OEH.

 

13

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Ofthe current portion of long-term debt $107,660,000 (December 31, 2008 -$105,373,000) related to revolving credit facilities which, although fallingdue within 12 months, are available for re-borrowing throughout the period ofthe loan facilities which are repayable in 2011 and 2012.

 

Certaincredit agreements of OEH have restrictive covenants.  At March 31, 2009, OEH was in compliancewith all major covenants that applied to OEH (except as noted in the followingparagraph), including a minimum consolidated net worth test and a minimumconsolidated interest coverage test as defined under a bank-syndicated€190,000,000 loan facility.  OEH does notcurrently have any covenants in its loan agreements which limit the payment ofdividends.

 

Asdisclosed in the Company’s 2008 Form 10-K annual report, OEH was concernedthat it could violate a minimum $600,000,000 tangible net worth covenant in twolong-term debt facilities at March 31, 2009. Approximately $102,300,000had been borrowed under these facilities at March 31, 2009 when thetangible net worth calculated under the covenants was approximately$586,000,000. OEH has been negotiating with the bank lenders and has obtainedagreement in principle to a waiver of these net worth covenants. OEH expectsthat it will be required to repay $9,700,000 in June 2009 in connectionwith this waiver. No assurance can be given that OEH will be successful incompleting these negotiations and, therefore, the $102,300,000 borrowings havebeen shown in the current portion of long-term debt.

 

Thefollowing is a summary of the aggregate maturities of long-term debt, includingobligations under capital lease, at March 31, 2009 (dollars in thousands):

 
| **Year  ending December 31,** |   |    |          |   |
|------------------------------------|--------|---------|---------------|--------|
|                               |   |    |          |   |
| 2010                               |   | $       | 37,526        |   |
| 2011                               |   | 402,400 |          |
| 2012                               |   | 91,970  |          |
| 2013                               |   | 15,686  |          |
| 2014 and thereafter                |   | 58,802  |          |
|                               |   | $       |  606,384 |   |

 

14

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**9.             Otherliabilities**

 

Other liabilities are $1,462,000 of deferredconsideration on acquisition of land next to Maroma Resort and Spa afterdiscounting to present value, $1,914,000 of deferred income relating toguarantees given by OEH in connection with bank loans entered into by thePeruvian hotel joint nature operation (see Note 17), $4,340,000 in respect ofinterest rate swaps (see Note 16) and $12,490,000 of long-term accrued interestat Charleston Place Hotel.

 

**10.          Incometaxes**

 

The Company is incorporated in Bermuda, which does not impose an incometax. OEH’s effective tax rate is entirely due to the income taxes imposed byjurisdictions in which OEH conducts business other than Bermuda.

 

OEH recorded a tax benefit for the three months ended March 31,2009 of $9,377,000, compared to a benefit of $3,557,000 for the correspondingperiod in 2008. OEH’s current tax cost for the three months ended March 31,2009 was $2,828,000 compared to a cost of $2,261,000 in 2008.

 

OEH’s tax benefit for the three months ended March 31, 2009included a tax charge of $131,000 in respect of the provision under FIN 48, “Accountingfor Uncertainty of Income Taxes”, of which $59,000 relates to interest andpenalty costs associated with the uncertain tax positions.  OEH’s tax benefit of $3,557,000 for the threemonths ended March 31, 2008 included a tax charge of $286,000 in respectof the FIN 48 provision, including a charge of $253,000 that related to thepotential interest and penalty costs.

 

At March 31, 2009, OEH had recognized a $11,290,000 (December 31,2008 - $11,493,000) provision in respect of its uncertain tax positions.  OEH believes that it is reasonably possiblethat within the next 12 months the FIN 48 provision will decrease by about$3,000,000 to $4,500,000 as a result of the resolution of tax positions incertain jurisdictions in which OEH operates.

 

Earnings fromunconsolidated companies are reported net of tax in the statements ofconsolidated operations.  The taxprovision applicable to these unconsolidated companies in the three monthsended March 31, 2009 is $432,000, compared to a provision of $1,181,000 inthe corresponding period in 2008.

 

15

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**11.          Pensions**

 

Components ofnet periodic pension benefit cost were as follows (dollars in thousands)

 
| **Three months ended March 31,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                         |       | $          | —     |       | $          | — |   |
| Interest  cost                        |       | 228        |       | 310        |       |
| Expected  return on plan assets       |       | (148       | )          | (295       | )          |
| Amortization  of net loss             |       | 142        |       | 120        |       |
| Net  periodic benefit cost            |       | $          | 222        |       | $          | 135 |   |

 

As reported inNote 11 to the financial statements in the Company’s 2008 Form 10-K annualreport, OEH expected to contribute $1,097,000 to its defined benefit pensionplan in 2009.  As of March 31, 2009,$268,000 of contributions had been made. OEH anticipates contributing an additional $829,000 to fund its definedbenefit pension plan in 2009 for a total of $1,097,000.

 

**12.          Supplementalcash flow information**

                (Dollars in thousands)

 
| **Three months ended March 31,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Cash  paid for:                       |       |     |       |     |       |
| Interest                              |       | $        | 8,422      |     | $          | 12,626 |   |
| Income  taxes                         |       | $        | 2,742      |     | $          | 5,070 |   |

 

In conjunction with acquisitions in the three monthsended March 31, 2008, liabilities were assumed as follows (dollars inthousands):

 
| **Three months ended March 31,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Fair  value of assets acquired        |       | —   |       | $        | 650        |   |
| Cash  paid                            |       | —   |       | (650     | )          |
| Liabilities  assumed                  |       | —   |       | $        | —     |   |

 

*Restricted cash*

 

Restricted cash of $13,263,000 at March 31, 2009and $13,224,000 at December 31, 2008 consisted mainly of the Porto Cupecoyescrow account. Cash received for residential condominium purchases at PortoCupecoy is held in escrow and released to OEH when the next phase ofconstruction is completed. At March 31, 2009, the Porto Cupecoy escrowaccount balance amounted to $9,259,000 (December 2008 — $8,168,000).

 

16

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**13.          Accumulatedother comprehensive income**

 

The accumulated balances for each component of other comprehensiveincome/(loss) are as follows (dollars in thousands):

 
| ** **                                          | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** |
|-----------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
|                                                |       |                     |          |                        |       |
| Foreign  currency translation adjustments           |       | $                        | (63,594       | )                           | $          | (40,851 | ) |
| Derivative  financial instruments                   |       | (9,290                   | )             | (8,633                      | )          |
| Pension  liability, net of tax of $3,106 and $3,106 |       | (10,726                  | )             | (10,726                     | )          |
|                                                |       | $                        |  (83,610 | )                           | $          | (60,210 | ) |

 

The components of comprehensive loss are as follows(dollars in thousands):

 
| **Three months ended March 31,**     | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Net  losses on common shares              |       | $        | (14,639    | )        | $          | (4,338 | ) |
| Foreign  currency translation adjustments |       | (22,743  | )          | 5,105    |       |
| Change  in fair value of derivatives      |       | (657     | )          | (2,743   | )          |
| Comprehensive  loss                       |       | $        | (38,039    | )        | $          | (1,976 | ) |

 

**14.          Commitmentsand contingencies**

 

Outstanding contracts to purchase fixed assets wereapproximately $70,153,000 at March 31, 2009 (December 31, 2008 -$76,606,000), including $52,000,000 (December 31, 2008 - $53,000,000) inrespect of the New York Public Library contracts referred to in the nextparagraph. Additionally, outstanding contracts for project related costs on thePorto Cupecoy development were approximately $25,052,000 at March 31, 2009(December 31, 2008 - $31,960,000).

 

As reported in the Company’s 2008 Form 10-Kannual report, OEH entered into agreements in November 2007 with the NewYork Public Library to acquire its Donnell Library branch site adjacent to ‘21’Club and to construct a mixed use hotel and residential development in New YorkCity. In February 2009, in light of current and anticipated futureeconomic conditions, OEH decided to suspend further payments under theagreements, as they had been amended in December 2008. OEH has been inactive 

 

17

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settlement discussions with the Library since February withrespect to an agreement to secure future payments and spread them over the next24 to 30 months. No assurance can be given that OEH will reach an acceptablesettlement with the Library.

 

**15.          Informationconcerning financial reporting for segments and operations in differentgeographical areas**

 

As reported in the Company’s 2008 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants, (ii) tourist trains and cruises, and (iii) real estateand property development.  Segmentperformance is evaluated based upon segment net earnings before interest,foreign currency, tax (including tax on earnings from unconsolidatedcompanies), depreciation and amortization (“segment EBITDA”).  Financial information regarding thesebusiness segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):

 
| **Three months ended March 31,**      | ** **       | **2009** | ** **   | **2008** | ** ** |
|--------------------------------------------|------------------|----------|--------------|----------|------------|
| Revenue:                                   |             |     |         |     |       |
| Hotels  and restaurants                    |             |     |         |     |       |
| Owned  hotels                              | -  Europe        |     | $            | 14,533   |       | $ | 27,139 |   |
|                                       | -  North America |     | 35,822       |     | 26,670     |   |
|                                       | -  Rest of world |     | 29,889       |     | 40,767     |   |
| Hotel  management/part ownership interests |             | 1,019    |         | 2,501    |       |
| Restaurants                                |             | 3,672    |         | 4,866    |       |
|                                       |             | 84,935   |         | 101,943  |       |
| Tourist  trains and cruises                |             | 4,477    |         | 8,654    |       |
| Real  estate                               |             | —   |         | 4,083    |       |
|                                       |             | $        |  89,412 |     | $          | 114,680 |   |
|                                       |             |     |         |     |       |
| Depreciation  and amortization:            |             |     |         |     |       |
| Hotels  and restaurants                    |             |     |         |     |       |
| Owned  hotels                              | -  Europe        |     | $            | 4,127    |       | $ | 4,686 |   |
|                                       | -  North America |     | 3,043        |     | 1,894      |   |
|                                       | -  Rest of world |     | 2,080        |     | 2,350      |   |
| Restaurants                                |             | 210      |         | 279      |       |
|                                       |             | 9,460    |         | 9,209    |       |
| Tourist  trains and cruises                |             | 654      |         | 1,075    |       |
|                                       |             | $        |  10,114 |     | $          | 10,284 |   |
| Segment  EBITDA:                           |             |     |         |     |       |
| Owned  hotels                              | -  Europe        |     | $            | (6,213   | )          | $ | (3,744 | ) |
|                                       | -  North America |     | 8,935        |     | 7,300      |   |
|                                       | -  Rest of world |     | 8,857        |     | 12,747     |   |
| Hotel  management/part ownership interests |             | 692      |         | 5,218    |       |
| Restaurants                                |             | 63       |         | 649      |       |
| Tourist  trains and cruises                |             | 1,443    |         | 1,543    |       |
| Real  estate                               |             | (319     | )            | (497     | )          |
| Impairment  of goodwill                    |             | (7,048   | )            | —   |       |
| Central  overheads                         |             | (5,105   | )            | (6,799)  |       |
|                                       |             | $        |  1,305  |     | $          | 16,417 |   |

 

18

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| **Three months ended March 31,**                            | ** **       | **2009** | ** **   | **2008** | ** ** |
|------------------------------------------------------------------|------------------|----------|--------------|----------|------------|
|                                                             |             |     |         |     |       |
| Segment EBITDA/net losses reconciliation:                        |             |     |         |     |       |
| Segment  EBITDA                                                  |             | $        | 1,305        |     | $          | 16,417 |   |
| Less:                                                            |             |     |         |     |       |
| Depreciation  and amortization                                   |             | 10,114   |         | 10,284   |       |
| Interest  expense, net                                           |             | 9,863    |         | 12,929   |       |
| Foreign  currency, net                                           |             | 3,838    |         | (2,045   | )          |
| Benefit  from income taxes                                       |             | (9,377   | )            | (3,557   | )          |
| Share  of provision for income taxes of unconsolidated companies |             | 432      |         | 1,181    |       |
| Losses  from continuing operations                               |             | $        | (13,565      | )        | $          | (2,375 | ) |
|                                                             |             |     |         |     |       |
| Earnings  from unconsolidated companies, net of tax:             |             |     |         |     |       |
| Hotels  and restaurants                                          |             |     |         |     |       |
| Hotel  management/part ownership interests                       |             | $        | (235         | )        | $          | 2,734 |   |
| Tourist  trains and cruises                                      |             | 1,354    |         | 1,333    |       |
|                                                             |             | $        |  1,119  |     | $          | 4,067 |   |
|                                                             |             |     |         |     |       |
| Capital  expenditure:                                            |             |     |         |     |       |
| Owned  hotels                                                    | -  Europe        |     | $            | 5,972    |       | $ | 9,867 |   |
|                                                             | -  North America |     | 4,771        |     | 5,106      |   |
|                                                             | -  Rest of world |     | 7,236        |     | 2,295      |   |
| Hotel  management/part ownership interests                       |             | 1,234    |         | —   |       |
| Restaurants                                                      |             | 92       |         | 55       |       |
| Tourist  trains and cruises                                      |             | 1,242    |         | 2,093    |       |
| Real  estate                                                     |             | 1,426    |         | 1,374    |       |
|                                                             |             | $        |  21,973 |     | $          | 20,790 |   |

 

Financial information regarding geographic areas basedon the location of properties is as follows (dollars in thousands):

 
| **Three months ended March 31,** | ** ** | **2009**   | ** **   | **2008**   | ** ** |
|---------------------------------------|------------|------------|--------------|------------|------------|
| ** **                            | ** ** | ** ** | ** **   | ** ** | ** ** |
| Revenue:                              |       |       |         |       |       |
| Europe                                |       | $          | 18,470       |       | $          | 33,234 |   |
| North  America                        |       | 39,113     |         | 36,691     |       |
| Rest  of world                        |       | 31,829     |         | 44,755     |       |
|                                  |       | $          |  89,412 |       | $          | 114,680 |   |

 

**16. Derivatives and hedging activities**

 

*Risk management objective of usingderivatives*

 

OEH enters into derivative financial instruments tomanage exposures that arise from business activities that result in the receiptor payment of future known and uncertain cash amounts, the value of which isdetermined by interest rates. OEH’s derivative financial instruments are usedto manage differences in the amount, timing and duration of OEH’s known orexpected cash receipts and payments principally related to its investments andborrowings.

 

19

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*Cash flow hedges of interest rate risk*

 

OEH’s objective in using interest rate derivatives isto add certainty and stability to its interest expense and to manage itsexposure to interest rate movements. To accomplish this objective, OEH primarilyuses interest rate swaps as part of its interest rate risk management strategy.Interest rate swaps designated as cash flow hedges involve the receipt ofvariable-rate amounts from a counterparty in exchange for OEH making fixed-ratepayments over the life of the agreements without the exchange of the underlyingnotional loan amount.

 

The effective portion of changes in the fair value ofderivatives designated and qualifying as cash flow hedges is recorded inaccumulated other comprehensive income and is subsequently reclassified intoearnings in the period that the hedged forecast transaction affects earnings.During the next 12 months, OEH estimates that an additional $5,708,000 will bereclassified as an increase to interest expense. During the three months ended March 31,2009, such derivatives were used to hedge the variable cash flows associatedwith existing variable interest rate debt. The ineffective portion of thechange in fair value of the derivatives is recognized directly in earnings.

 

As of March 31, 2009, OEH had the followingoutstanding interest rate derivatives that were designated as cash flow hedgesof interest rate risk:

 
| **Interest Rate Derivatives** | ** ** | **Notional Amount** | ** **  |
|-------------------------------|------------|---------------------|-------------|
|                          |       |                |        |
| Interest  Rate Swap           |       | €              | 75,000,000  |   |
| Interest  Rate Swaps          |       | $                   | 181,283,000 |   |

 

*Non-designated hedges of interest rate risk*

 

Derivatives not designated as hedges are used tomanage OEH’s exposure to interest rate movements but do not meet the stricthedge accounting requirements of SFAS No. 133. As of March 31, 2009,OEH had one interest rate swap with a €24,700,000 notional amount that was anon-designated hedge of OEH’s exposure to interest rate risk.

 

The table below presents the fair value of OEH’sderivative financial instruments as well as their classification as of March 31,2009 (dollars in thousands).

 

20

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| ** **                                                             | ** ** | **Liability  Derivatives**  | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value as of  March 31,2009** | ** ** | **Fair Value as of December 31, 2008** | ** ** |
| Derivatives  designated as hedging instruments under SFAS No. 133 |       |                        |       |   |   |   |   |
| Interest  Rate Swaps                                                   |       | Accrued liabilities         |       | $ | 6,169 |   | $ | 5,540 |   |
| Interest  Rate Swaps                                                   |       | Other liabilities           |       | 3,556 |   | 6,248 |   |
| Total                                                                  |       |                        |       | $ | 9,725 |   | $ | 11,788 |   |
|                                                                   |       |                        |       |   |   |   |   |
| Derivatives  not designated as hedging instruments under SFAS No.133   |       |                        |       |   |   |   |   |
| Interest  Rate Swap                                                    |       | Accrued liabilities         |       | $ | 826 |   | $ | 336 |   |
| Interest  Rate Swap                                                    |       | Other liabilities           |       | 784 |   | 557 |   |
| Total                                                                  |       |                        |       | $ | 1,610 |   | $ | 893 |   |

 

The table below (in which “OCI” means othercomprehensive income) presents the effect of OEH’s derivative financialinstruments on the income statement for the three months ended March 31,2009 and 2008 (dollars in thousands):

 
| **Three months ended March 31,**                                                 | ** ** | ** 2009**       | ** ** | **2008**             | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                                                  |       |                 |       |                 |       |
| Derivatives  in SFAS No. 133 cash flow hedging relationship                      |       | Interest rate  swaps |       | Interest  rate swaps |       |
| Amount  of (loss) recognized in OCI (effective portion), net of tax                   |       | $                    | (1,172     | )                    | $          | (2,743 | ) |
| Location  of (loss) reclassified from accumulated OCI into income (effective portion) |       | Interest  expense    |       | Interest  expense    |       |
| Amount  of (loss) reclassified from accumulated OCI into income (effective portion)   |       | $                    | (859       | )                    | $          | (313 | ) |
| Location  of gain recognized in income on derivatives (ineffective portion)           |       | Interest  expense    |       | Interest expense     |       |
| Amount  of gain/(loss) recognized in income on derivatives (ineffective portion)      |       | $                    | 368        |                 | $          | (125 | ) |
|                                                                                  |       |                 |       |                 |       |
| Derivatives  not designated as hedging instruments under SFAS No. 133                 |       | Interest  rate swap  |       | Interest  rate swap  |       |
| Location  of (loss) recognized in income                                              |       | Interest  expense    |       | Interest  expense    |       |
| Amount  of (loss) recognized in income                                                |       | $                    | (599       | )                    | $          | (410 | ) |

 

21

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*Credit-risk-related contingent features*

 

OEH has agreements with each of its derivativecounterparties that contain a provision under which if OEH defaults on any ofits indebtedness, then OEH could also be declared in default in respect of itsderivative obligations.

 

As of March 31, 2009, the fair value ofderivatives in a net liability position, which includes accrued interest butexcludes any adjustment for non-performance risk, related to these agreementswas $15,425,000. As of March 31, 2009, OEH has posted cash collateral of$2,900,000 with certain of its derivative counterparties in respect of thesenet liability positions. If OEH breached any of these provisions, it would berequired to settle its obligations under the agreements at their terminationvalue of $15,425,000.

 

*SFAS No. 157 disclosures*

 

The followingtable summarizes the valuation of OEH’s assets and liabilities by the SFAS No. 157fair value hierarchy at March 31, 2009 (dollars in thousands):

 
| ** **                        | ** ** | **March 31, 2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets  at fair value:            |       |                    |       |   |   |   |   |   |   |
| Derivative  financial instruments |       | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Total  assets                     |       | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Liabilities  at fair value:       |       |                    |       |   |   |   |   |   |   |
| Derivative  financial instruments |       | $                       | —     |   | $ | 3,724 |   | $ | 7,611 |   | $ | 11,335 |   |
| Total  liabilities                |       | $                       | —     |   | $ | 3,724 |   | $ | 7,611 |   | $ | 11,335 |   |

 

The tablebelow presents a reconciliation of the beginning and ending balances ofliabilities having fair value measurements based on significant unobservableinputs (Level 3) (dollars in thousands):

 
| ** **                        | ** ** | **Beginning  balance at  January 1,  2009** | ** ** | **Transfers  into  Level 3** | ** ** | **Realized  losses  included in  earnings** | ** ** | **Unrealized  gains  included in  other  comprehensive  income** | ** ** | **Ending  balance  at March  31, 2009** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| Liabilities  at fair value:       |       |                                             |       |                         |       |                                        |       |                                                             |       |                                    |       |
| Derivative  financial instruments |       | $                                                | 5,858      |                         | $          | 2,926                                       |       | $                                                                | 348        |                                    | $          | (1,521 | ) | $ | 7,611 |   |
| Total  liabilities                |       | $                                                | 5,858      |                         | $          | 2,926                                       |       | $                                                                | 348        |                                    | $          | (1,521 | ) | $ | 7,611 |   |

 

22

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OEH reviewsits fair value hierarchy classifications quarterly.  Changes insignificant observable valuation inputs identified during these reviews maytrigger a reclassification of the fair value hierarchy levels of financialassets and liabilities.  These reclassifications are reported as transfersin Level 3 at their fair values at the beginning of the period in which thechange occurs and the transfers out at their fair values at the end of theperiod.  During the three months ended March 31, 2009, OEHtransferred certain derivative instruments due to increased significance ofunobservable inputs used to estimate the fair value of these securities.

 

The fair valueof OEH’s derivative financial instruments is computed based on an incomeapproach using appropriate valuation techniques including discounting futurecash flows and other methods that are consistent with accepted economicmethodologies for pricing financial instruments.  Where credit valueadjustments exceeded 20% of the fair value of the derivatives, Level 3 inputsare assumed to have a significant impact on the fair value of the derivativesin their entirety and the valuation has been classified in the Level 3category.

 

*Non-derivative financialinstruments – net investment hedges*

 

OEH usescertain of its debt denominated in foreign currency to hedge portions of itsnet investments in foreign operations against adverse movements in exchangerates.  These contracts are included innon-derivative hedging instruments. The fair values of non-derivativehedging instruments were $79,660,000 at March 31, 2009 and $83,403,000 at December31, 2008, both liabilities. Amounts recorded in other comprehensive income were$3,743,000 gain for the three months ended March 31, 2009 and $4,322,000 lossfor the three months ended March 31, 2008.

 

**17.          Relatedparty transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  The amount due to OEH by Eastern and OrientalExpress Ltd. at March 31, 2009 was $645,000 (December 31, 2008$1,290,000).

 

OEH manages under long-term contracts the Hotel Monasterio, the MachuPicchu Sanctuary Lodge and Las Casitas del Colca owned by its 50/50 jointventure with local Peruvian interests, as well as the 50/50-owned PeruRailoperation, and provides loans, guarantees and other credit accommodation tothese joint ventures.  In the threemonths ended March 31, 2009, OEH earned management and guarantee fees of$1,470,000 (2008 - $1,712,000) and loan interest of $nil (2008 - $16,000) whichis recorded in revenue. The amount due to OEH from its joint venture Peruvianoperations at March 31, 2009 was $7,157,000 (December 31, 2008 -$6,502,000).

 

OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain,in which OEH owns a 50% interest and is accounted for under the equitymethod.  For the three months ended March 31,2009, OEH earned $224,000 (2008 - $346,000) in management fees, which areincluded in revenue.  The amount due toOEH from the Hotel Ritz, Madrid, at March 31, 2009 was $4,405,000 (December 31,2008 - $1,883,000).

 

23

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OEH has granted to James Sherwood, a director of the Company, a rightof first refusal to purchase the Hotel Cipriani in Venice, Italy in the eventOEH proposes to sell it.  The purchaseprice would be the offered sale price in the case of a cash sale or the fairmarket value of the hotel, as determined by an independent valuer, in the caseof a non-cash sale.  Mr. Sherwoodhas also been granted an option to purchase the hotel at fair market value if achange in control of the Company occurs.

 

**18.          Subsequent events**

 

*Porto Cupecoy financing*

 

In April 2009,OEH closed a $30,000,000 secured construction loan for its Porto Cupecoyresidential mixed-use development project on the Dutch side of St Martin,French West Indies.  OEH has drawn$5,200,000 of this loan and has access to a further $12,700,000 to fund futureexpenditure on the project, and may borrow additional amounts as new unit salesat Porto Cupecoy are closed.  The PortoCupecoy project is expected to be completed later this year, and as of March 31,2009, 84 of the 181 condominium units had been sold.

 

*OEHshare offering*

 

On May 4, 2009, the Company completed a public offering throughunderwriters in the United States of 25,875,000 newly issued class A common sharesincluding 3,375,000 shares covered by the underwriters’ over-allotment optionin the offering which was exercised in full. OEH intends to use the netproceeds, approximately $141,300,000, primarily for debt reduction and generalcorporate purposes.

 

24

----

 

**ITEM 2.           Management’sDiscussion and Analysis of Financial****Condition and Results ofOperations**

 

**Introduction**

 

OEH has threebusiness segments, namely (1) hotels and restaurants, (2) touristtrains and cruises and (3) real estate and property development. Hotelscurrently consist of 41 deluxe hotels. Thirty-seven of these hotels are whollyor majority owned (except Charleston Place Hotel), and are referred to in thisdiscussion as “owned hotels.” As explained in Note 3 to the financialstatements, OEH holds a 19.9% equity investment in Charleston Center LLC, ownerof Charleston Place Hotel, which OEH manages and has consolidated into itsfinancial statements effective December 31, 2008. The other four hotels, inwhich OEH has unconsolidated equity interests and operate under managementcontracts, are referred to in this discussion as “hotel management interests.”Of the owned hotels, 12 are located in Europe, eight in North America and 17 inthe rest of the world.

 

In December 2007,Bora Bora Lagoon Resort was designated as held for sale, and, accordingly, theresults of the hotel have been reflected as discontinued operations.

 

Also, OEHcurrently owns and operates the restaurants ‘21’ Club in New York and La Cabanain Buenos Aires.

 

OEH’s touristtrains and cruises segment operates six tourist trains — four of which areowned and operated by OEH, one in which OEH has an equity interest andexclusive management contracts, and one in which OEH has an equity investment —and a river cruiseship and five canalboats.

 

For adiscussion of OEH’s liquidity, see under the heading “Liquidity and CapitalResources” below.

 

For adiscussion of the impact of foreign exchange rate movements on OEH’s results ofoperations and financial condition and the change of application of accounting policy for Porto Cupecoy, see Item7 — Management’s Discussion and Analysis in the Company’s 2008 Form 10-Kannual report

 

**Resultsof Operations**

 

**Threemonths Ended March 31, 2009 compared to**

**Threemonths Ended March 31, 2008**

 

OEH’s operating results for the three months ended March 31,2009 and 2008, expressed as a percentage of revenue, were as follows:

 

25

----

 
| **Three months ended March 31,**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **%**    | ** ** | **%**    | ** ** |
| Revenue                                              |       |     |       |     |       |
| Hotels  and restaurants                              |       | 95       |       | 89       |       |
| Tourist  trains and cruises                          |       | 5        |       | 7        |       |
| Real  estate                                         |       | —   |       | 4        |       |
|                                                 |       | 100      |       | 100      |       |
| Expenses                                             |       |     |       |     |       |
| Depreciation  and amortization                       |       | 11       |       | 9        |       |
| Operating                                            |       | 51       |       | 52       |       |
| Selling,  general and administrative                 |       | 42       |       | 38       |       |
| Impairment  of goodwill                              |       | 8        |       | —   |       |
| Net  finance costs                                   |       | 15       |       | 9        |       |
| Losses  before income taxes                          |       | (27      | )          | (8       | )          |
| Benefit  from income taxes                           |       | 11       |       | 3        |       |
| Earnings  from unconsolidated companies              |       | 1        |       | 3        |       |
| Net  losses from continuing operations               |       | (15      | )          | (2       | )          |
| Net  losses from discontinued operations, net of tax |       | (1       | )          | (2       | )          |
| Net  losses as a percentage of revenue               |       | (16      | )          | (4       | )          |

 

Segment net earnings before interest,foreign currency, tax (including tax on unconsolidated companies), depreciationand amortization (“segment EBITDA”) of OEH’s operations for the three monthsended March 31, 2009 and 2008 are analyzed as follows (dollars inmillions):

 
| **Three months ended March 31,** | ** ** | **2009**   | ** ** | **2008** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
|                                  |       |       |       |     |       |
| Segment  EBITDA:                      |       |       |       |     |       |
| Owned  hotels:                        |       |       |       |     |       |
| Europe                                |       | $          | (6.2       | )        | $          | (3.7 | ) |
| North  America                        |       | 8.9        |       | 7.3      |       |
| Rest  of the World                    |       | 8.8        |       | 12.7     |       |
| Hotel  management interests           |       | 0.7        |       | 5.2      |       |
| Restaurants                           |       | 0.1        |       | 0.6      |       |
| Tourist  trains and cruises           |       | 1.4        |       | 1.5      |       |
| Real  estate                          |       | (0.3       | )          | (0.4     | )          |
| Impairment  of goodwill               |       | (7.0       | )          | —   |       |
| Central  overheads                    |       |  (5.1 | )          | (6.8     | )          |
| Total  segment EBITDA                 |       | $          | 1.3        |     | $          | 16.4 |   |

 

The foregoingsegment EBITDA reconciles to net losses as follows (dollars in millions):

 

26

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| **Three months ended March 31,**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Net  losses                                                      |       | $        | (14.6      | )        | $          | (4.3 | ) |
| Add:                                                             |       |     |       |     |       |
| Depreciation  and amortization                                   |       | 10.1     |       | 10.3     |       |
| Net  finance costs                                               |       | 13.7     |       | 10.9     |       |
| Benefit  from income taxes                                       |       | (9.4     | )          | (3.6     | )          |
| Loss  from discontinued operations, net of tax                   |       | 1.1      |       | 1.9      |       |
| Share  of provision for income taxes of unconsolidated companies |       | 0.4      |       | 1.2      |       |
| Segment  EBITDA                                                  |       | $        | 1.3        |     | $          | 16.4 |   |

 

Managementevaluates the operating performance of OEH’s segments on the basis of segmentEBITDA and believes that segment EBITDA is a useful measure of operatingperformance because segment EBITDA is not affected by non-operating factorssuch as leverage and the historic cost of assets.  EBITDA is a financial measure commonly usedin OEH’s industry.  OEH’s segment EBITDA,however, may not be comparable in all instances to EBITDA as disclosed by othercompanies.  Segment EBITDA should not beconsidered as an alternative to earnings from operations or net earnings (asdetermined in accordance with U.S. generally accepted accounting principles) asa measure of OEH’s operating performance, or as an alternative to net cash providedby operating, investing and financing activities (as determined in accordancewith U.S. generally accepted accounting principles) as a measure of OEH’sability to meet cash needs.

 

Operating information for OEH’s owned hotels for thethree months ended March 31, 2009 and 2008 is as follows:

 

27

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| ** **                       | ** ** | **Three months  ended March 31,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                       | ** ** | **2009**                               | ** ** | **2008**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Average  Daily Rate (in dollars) |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Europe                           |       | 360                                    |       | 464        |       | ** **   | ** ** | ** ** | ** ** |
| North  America                   |       | 432                                    |       | 470        |       | ** **   | ** ** | ** ** | ** ** |
| Rest  of the world               |       | 280                                    |       | 296        |       | ** **   | ** ** | ** ** | ** ** |
| Worldwide                        |       | 337                                    |       | 372        |       | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Rooms  Available (in thousands)  |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Europe                           |       | 61                                     |       | 64         |       | ** **   | ** ** | ** ** | ** ** |
| North  America                   |       | 57                                     |       | 57         |       | ** **   | ** ** | ** ** | ** ** |
| Rest  of the world               |       | 115                                    |       | 123        |       | ** **   | ** ** | ** ** | ** ** |
| Worldwide                        |       | 234                                    |       | 244        |       | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Rooms  Sold (in thousands)       |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Europe                           |       | 17                                     |       | 27         |       | ** **   | ** ** | ** ** | ** ** |
| North  America                   |       | 35                                     |       | 38         |       | ** **   | ** ** | ** ** | ** ** |
| Rest  of the world               |       | 66                                     |       | 82         |       | ** **   | ** ** | ** ** | ** ** |
| Worldwide                        |       | 118                                    |       | 147        |       | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Occupancy  (percentage)          |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Europe                           |       | 28                                     |       | 43         |       | ** **   | ** ** | ** ** | ** ** |
| North  America                   |       | 61                                     |       | 67         |       | ** **   | ** ** | ** ** | ** ** |
| Rest  of the world               |       | 57                                     |       | 67         |       | ** **   | ** ** | ** ** | ** ** |
| Worldwide                        |       | 50                                     |       | 61         |       | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| RevPAR  (in dollars)             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| Europe                           |       | 100                                    |       | 201        |       | ** **   | ** ** | ** ** | ** ** |
| North  America                   |       | 266                                    |       | 314        |       | ** **   | ** ** | ** ** | ** ** |
| Rest  of the world               |       | 160                                    |       | 198        |       | ** **   | ** ** | ** ** | ** ** |
| Worldwide                        |       | 170                                    |       | 226        |       | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                   |       |       |       | ** **   | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                             | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                       | ** ** | ** **                             | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local  Currency** | ** ** |
| Same  Store RevPAR (in dollars)  |       |                                   |       |       |       |         |       |   |   |
| Europe                           |       | 100                                    |       | 192        |       | -48          | %          | -35 | % |
| North  America                   |       | 266                                    |       | 314        |       | -15          | %          | -15 | % |
| Rest  of the world               |       | 164                                    |       | 212        |       | -23          | %          | -12 | % |
| Worldwide                        |       | 173                                    |       | 232        |       | -26          | %          | -18 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night of operation. Occupancy is the number of rooms sold divided by the number of availablerooms.  Same store RevPAR is a comparisonbased on the operations of the same units in each period, such as by excludingthe effect of any acquisitions or major refurbishments.  The same store data excludes the followingoperations:

 

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|   | Hotel  Cipriani     | Hotel  Splendido        |
|--------|---------------------|-------------------------|
|   | Villa  San Michele  | Hotel  Caruso Belvedere |
|   | Hotel das Cataratas | Charleston Place Hotel  |

 

*Overview*

 

The net loss for the three months ended March 31,2009 was $14.6 million ($0.29 per common share) on revenue of $89.4 million,compared with a net loss of $4.3 million ($0.10 per common share) on revenue of$114.7 million in the prior year first quarter.

 

The first quarter is a traditional loss-making periodbecause a number of OEH’s properties are closed for the winter, the VeniceSimplon-Orient-Express train does not operate for most of the quarter andtourist arrivals are low in locations with poor winter weather.

 

OEH’s revenue in the three months ended March 31,2009 was affected by the global economic downturn. Management’s focus duringthe period has been to control expenditures. Excluding impairment of goodwillin 2009 and discontinued operations, OEH’s net earnings in the current quarterwere $4.1 million lower than in the prior year – a $6.5 million loss in 2009compared with a loss of $2.4 million in 2008 – whereas revenue fell by $25.3million in the three months ended March 31, 2009 compared to the threemonths ended March 31, 2008.

 

*Revenue*

 
| **Three months ended March 31,**      | ** ** | **2009**                   | ** **   | **2008** | ** ** |
|--------------------------------------------|------------|----------------------------|--------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** **   |
| Revenue:                                   |       |                       |         |     |       |
| Hotels  and restaurants                    |       |                       |         |     |       |
| Owned  hotels                              |       |                       |         |     |       |
| Europe                                     |       | $                          | 14,533       |     | $          | 27,139 |   |
| North  America                             |       | 35,822                     |         | 26,670   |       |
| Rest  of the world                         |       | 29,889                     |         | 40,767   |       |
| Hotel  management/part ownership interests |       | 1,019                      |         | 2,501    |       |
| Restaurants                                |       | 3,672                      |         | 4,866    |       |
|                                       |       | 84,935                     |         | 101,943  |       |
| Tourist  trains and cruises                |       | 4,477                      |         | 8,654    |       |
| Real  estate                               |       | —                     |         | 4,083    |       |
|                                       |       | $                          |  89,412 |     | $          | 114,680 |   |

 

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Total revenue decreased by $25.3 million, or 22%, from$114.7 million in the three months ended March 31, 2008 to $89.4 millionin the three months ended March 31, 2009. Revenue in the three months ended March 31, 2009 included $11.5million at Charleston Place Hotel, which is consolidated for the first time inthe current year. Excluding the Charleston Place revenue, hotels andrestaurants revenue decreased by $28.4 million, or 28%, from $101.9 million inthe three months ended March 31, 2008 to $73.5 million in the three monthsended March 31, 2009.  Touristtrains and cruises revenue decreased by $4.2 million, or 48%, from $8.7 millionfor the three months ended March 31, 2008 to $4.5 million for the threemonths ended March 31, 2009.

 

The decrease in hotel revenue was due primarily to thecombination of lower occupancy, particularly in Europe, and lower average ratesacross the group. The decrease in hotel revenue was exacerbated by the impactof foreign currency exchange rate movements against the U.S. dollar in Europeand the Rest of the World regions.

 

The revenue from restaurants decreased by $1.2million, or 25%, from $4.9 million in the three months ended March 31,2008 to $3.7 million for the three months ended March 31, 2009.

 

For owned hotels overall, same store RevPAR in U.S.dollars decreased by 26% in the three months ended March 31, 2009 comparedto the three months ended March 31, 2008. Measured in local currencies this decrease was 18%.

 

The change in revenue at owned hotels is analyzed on aregional basis as follows:

 

*Europe*

 

Revenue decreased by $12.6 million, or 46%, from $27.1million for the three months ended March 31, 2008 to $14.5 million for thethree months ended March 31, 2009. Difficult trading conditions acrossEurope caused average daily rates to fall by 22% from $464 in the three monthsended March 31, 2008 to $360 in the three months ended March 31,2009, and occupancy to fall from 43% in the three months ended March 31,2008 to 28% in the three months ended March 31, 2009. On a same storebasis, RevPAR in local currency decreased by 35%, and in U.S. dollars thistranslated into a decrease of 48%.

 

Exchange rate movements caused revenue to fall by $4.2million in the three months ended March 31, 2009 compared with the sameperiod in 2008. OEH’s four Italian hotels remained closed through the threemonths ended March 31, 2009. These four hotels had generated revenue of$1.7 million in the three months ended March 31, 2008. Excluding theeffect of exchange rate movements, the revenue at the Grand Hotel Europe fellby $2.8 million in the three months ended March 31, 2009.

 

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*North America*

 

Revenue increased by $9.1 million, or 34%, from $26.7million in the three months ended March 31, 2008 to $35.8 million in thethree months ended March 31, 2009. The 2009 revenue included $11.5 million at Charleston Place Hotel, whichOEH consolidated from January 1, 2009 for the first time. ExcludingCharleston Place, revenue in the North America region fell by $2.3 million, or9%, in the three months ended March 31, 2009 to $24.4 million.

 

On a same store basis, excluding Charleston PlaceHotel, RevPAR decreased by 15%.  Averageoccupancy across the North American properties was 61% compared to 67% in thesame period in 2008. Average daily rates fell by 8% from $470 in the threemonths ended March 31, 2008 to $432 in the three months ended March 31,2009

 

*Rest of the World*

 

Revenue decreased by $10.9 million, or 27%, from $40.8million in the three months ended March 31, 2008 to $29.9 million in thethree months ended March 31, 2009. Exchange rate movements across the region were responsible for $8.3million of the revenue fall and a decline in average room rates and occupancycaused overall revenue to drop by an additional $2.6 million.

 

Revenue at OEH’s hotels in South America collectivelydecreased by $3.7 million, or 21%, from $17.6 million in the three months endedMarch 31, 2008 to $13.9 million in the three months ended March 31,2009. Had exchange rates in the first three months of 2009 been the same as inthe first three months of 2008, South American revenue would have been $0.5 millionhigher than in the three months ended March 31, 2008.

 

Revenue at OEH’s six Asian hotels collectivelydecreased by $1.0 million, or 20%, to $4.3 million in the three months ended March 31,2009. The political unrest in Thailand was a major factor in revenue at theNapasai falling by $0.7 million, or 43%. Occupancy at this hotel declined from71% in the three months ended March 31, 2008 to 42% in the same period in2009.

 

Southern Africa revenue decreased by $4.2 million, or36%, of which $2.3 million was due to exchange rate movements on thetranslation of the South African rand and Botswana pula to U.S. dollar. Revenueat OEH’s two Australian properties decreased by $2.0 million, or 32%, to $4.2million in the three months ended March 31, 2009; 75% of the change inrevenue, or $1.5 million, was due to the devaluation of the Australian dollaragainst the U.S. dollar in the second half of 2008 and the beginning of 2009.

 

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The RevPAR on a same store basis for the Rest of theWorld region decreased by 12% in local currencies in the three months ended March 31,2009 compared to the three months ended March 31, 2008.  This translates to a 23% decrease whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests: *Revenue decreased by $1.5million from $2.5 million in the three months ended March 31, 2008 to $1.0million in the three months ended March 31, 2009. The 2008 revenueincluded $1.2 million in respect of Charleston Place Hotel, which is includedwithin OEH’s consolidated earnings with effect from January 1, 2009.Excluding this hotel from the prior year, revenue from hotel management andpart ownership interests decreased by $0.3 million from $1.3 million in thethree months ended March 31, 2008 to $1.0 million in the three monthsended March 31, 2009.

 

*Restaurants: *Revenuedecreased by $1.2 million, or 25%, from $4.9 million in the three months ended March 31,2008 to $3.7 million in the three months ended March 31, 2009.

 

*Trains and Cruises: *Revenue decreased by $4.2 million, or 48%,from $8.7 million in the three months ended March 31, 2008 to $4.5 millionin the three months ended March 31, 2009. Venice Simplon-Orient-Express revenue decreased by $1.1 million from$1.9 million in the three months ended March 31, 2008 to $0.8 million inthe three months ended March 31, 2009, as a result of running two fewerservices in the current year.  Fewer daytrain services were operated in the United Kingdom in the three months ended March 31,2009 than in the prior year, resulting in a revenue decrease of $0.4 millioncompared with the same period in the prior year.

 

*Real Estate: *Although11 condominiums at Porto Cupecoy were sold during the three months ended March 31,2009,**no revenue was recognized following OEH’sdecision to change the application ofits accounting policy in respect of the Porto Cupecoy development in thefourth quarter of 2008. Revenue of $3.7 million was recognized in the threemonths ended March 31, 2008 at Porto Cupecoy under the percentagecompletion method of accounting. There was no revenue at Keswick Hall in thethree months ended March 31, 2009 compared to revenue of $0.3 million inrespect of the one lot sold in the three months ended March 31, 2008.

 

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*Depreciation and amortization*

 

Depreciation and amortization decreased by $0.2million from $10.3 million in the three months ended March 31, 2008 to$10.1 million in the three months ended March 31, 2009. The 2009depreciation charge includes an expense of $1.0 million in respect ofCharleston Place. Excluding this charge, depreciation was $1.2 million lower in2009 than in the prior period, $0.6 million of which was due to the change inexchange rates for the three months ended March 31, 2009 compared withexchange rates in the same period in 2008.

 

*Operating expenses*

 

Operating expenses decreased by $14.5 million from$59.7 million in the three months ended March 31, 2008 to $45.2 million inthe three months ended March 31, 2009. Operating expenses in 2009 includea charge of $5.0 million in respect of Charleston Place. Excluding thisexpenditure, operating expenses were $19.5 million lower in 2009 than in theprior period, $2.6 million of which was due to the change in exchange rates forthe three months ended March 31, 2009 compared with exchange rates in thesame period in 2008. Operating expenses were 52% of revenue in the three monthsended March 31, 2008 and 51% of revenue in the three months ended March 31,2009. Excluding Charleston Place Hotel’s revenue and expenses, operatingexpenses in 2009 were unchanged at 52% of revenue.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses decreasedby $6.4 million from $43.8 million in the three months ended March 31,2008 to $37.4 million in the three months ended March 31, 2009. The 2009costs include a charge of $3.4 million in respect of Charleston Place Hotel.Excluding these costs, selling, general and administrative expenses were $9.8million lower in 2009 than in the prior period, $2.8 million of which was dueto the change in exchange rates for the three months ended March 31, 2009compared with exchange rates in the same period in 2008. Selling, general andadministrative expenses were 38% of revenue in the three months ended March 31,2008 and 42% of revenue in the three months ended March 31, 2009.Excluding Charleston Place Hotel’s revenue and expenses, selling, general andadministrative expenses in 2009 were 44% of revenue in 2009.

 

*Impairment of goodwill*

 

During thethree months ended March 31, 2009, OEH completed its 2008 impairmentanalysis and identified the following non-cash goodwill and tradenameimpairments within its continuing operations, considering discounted futurecash flows prepared as of the December 31, 2008 balance sheet date(dollars in millions):

 

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| Miraflores  Park          |   | $   | 3.2       |   |
|---------------------------|--------|-----|-----------|--------|
| Casa  de Sierra Nevada    |   | 3.0 |      |
| Lilianfels  Blue Mountain |   | 0.5 |      |
| Observatory  Hotel        |   | 0.3 |      |
|                      |   | $   |  7.0 |   |

 

Theseimpairments have no cash effect on OEH and arose primarily because of expectedreductions in future cash flows.

 

*Segment EBITDA*

 
| **Three months ended March 31**       | ** ** | **2009**                   | ** **  | **2008** | ** ** |
|--------------------------------------------|------------|----------------------------|-------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** **  |
| Segment  EBITDA:                           |       |                       |        |     |       |
| Hotels  and restaurants                    |       |                       |        |     |       |
| Owned  hotels                              |       |                       |        |     |       |
| Europe                                     |       | $                          | (6,213      | )        | $          | (3,744 | ) |
| North  America                             |       | 8,935                      |        | 7,300    |       |
| Rest  of the world                         |       | 8,857                      |        | 12,747   |       |
| Hotel  management/part ownership interests |       | 692                        |        | 5,218    |       |
| Restaurants                                |       | 63                         |        | 649      |       |
|                                       |       | 12,334                     |        | 22,170   |       |
| Tourist  trains and cruises                |       | 1,443                      |        | 1,543    |       |
| Real  estate                               |       | (319                       | )           | (497     | )          |
| Impairment  of goodwill                    |       | (7,048                     | )           | —   |       |
| Central  overheads                         |       |  (5,105               | )           | (6,799   | )          |
|                                       |       |                       |        |     |       |
|                                       |       | $                          |  1,305 |     | $          | 16,417 |   |

 

Segment EBITDA for the three months ended March 31,2009 decreased by 92% from $16.4 million in 2008 to $1.3 million in 2009.Segment EBITDA margins (calculated as segment EBITDA as a percentage ofrevenue) decreased by 13% from 14% for the three months ended March 31,2008, to 1% for the three months ended March 31, 2009. Excludingimpairment of goodwill in the three months ended March 31, 2009, segmentEBITDA decreased by 49%, or $8.1 million, to $8.4 million. The segment EBITDAmargin in the three months ended March 31, 2009, excluding the impact ofthe impairment of goodwill, was 9%.

 

The European hotels collectively reported a segmentEBITDA loss of $6.2 million in 2009 compared to a loss of $3.7 million in thesame period in 2008.  As a percentage ofEuropean hotels revenue, the European segment EBITDA margin fell from negative14% in 2008 to negative 43% in 2009.

 

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With the inclusion of Charleston Place Hotel from January 1,2009, segment EBITDA in the North American hotel region increased by 22% from$7.3 million in the three months ended March 31, 2008, to $8.9 million inthe three months ended March 31, 2009. Excluding Charleston Place Hotel,segment EBITDA in the North American region decreased by $1.2 million, or 16%.

 

Segment EBITDA in the Rest of the World hotel regiondecreased by 30% from $12.7 million in the three months ended March 31,2008 to $8.9 million in the three months ended March 31, 2009.  The segment EBITDA margin for the threemonths ended March 31, 2009 was 30%, compared to a margin of 31% for thesame period in 2008.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $11.3 millionfrom a profit of $0.9 million in the three months ended March 31, 2008 toa loss of $10.4 million in the three months ended March 31, 2009, due tothe factors described above.

 

*Net finance costs*

 

Net finance costs increased by $2.8 million, or 26%,from $10.9 million for the three months ended March 31, 2008 to $13.7million for the three months ended March 31, 2009.  The three months ended March 31, 2008 includeda foreign exchange gain of $2.0 million compared to a foreign exchange loss of$3.8 million in the three months ended March 31, 2009. Excluding theseforeign exchange items, net interest expense decreased by $3.0 million, or 24%,from $12.9 million in the three months ended March 31, 2008 to $9.9million in the three months ended March 31, 2009. The benefit derived fromthe lower interest rates in the three months ended March 31, 2009 comparedto the same period in the prior year was partially offset by the additionalinterest expense arising on OEH’s additional bank liabilities in the currentyear.

 

*Benefit from income taxes*

 

The benefit from income taxes increased by $5.8 million, from abenefit of $3.6 million in the three months ended March 31, 2008 to abenefit of $9.4million in the three months ended March 31, 2009.

 

The benefit from income taxes for the three months ended March 31,2009 included a tax provision of $0.1 million in respect of theFIN 48 liability, compared to a provision of $0.3 million in respect of the FIN48 liability in the three months ended March 31, 2008.

 

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*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxdecreased by $3.0 million, from $4.1 million in the three months ended March 31,2008 to $1.1 million in the three months ended March 31, 2009.  The 2008 earnings included $1.9 million inrespect of Charleston Place Hotel, which is included within OEH’s consolidatedearnings with effect from January 1, 2009. Excluding this hotel from theprior year, earnings from unconsolidated companies net of tax decreased by $1.1million from $2.2 million in the three months ended March 31, 2008 to $1.1million in the three months ended March 31, 2009. The tax cost associatedwith earnings from unconsolidated companies, excluding Charleston Place Hotel,was $0.5 million in 2008 and $0.4 million in 2009.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of theloss from Bora Bora Lagoon Resort which is being held for sale.  The hotel’s net loss decreased from $2.0million for the three months ended March 31, 2008 to $1.1 million for thethree months ended March 31, 2009.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $41.6 million at March 31,2009, $24.2 million less than the $65.8 million at December 31, 2008. Inaddition, OEH had restricted cash of $13.3 million (December 31, 2008 -$13.2 million) mainly related to the Porto Cupecoy project in St Martin, whichwill be released when the next 12.5% phase of construction is completed.  At March 31, 2009, there were undrawnamounts available to OEH under committed short-term lines of credit of $8.0million and undrawn amounts available to OEH under secured revolving creditfacilities of $32.0 million, bringing total cash availability at March 31,2009 to $94.9 million, including the restricted cash of $13.3 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital deficit of $157.7million at March 31, 2009, an increase of $126.2 million from a deficit of$31.5 million working capital deficit at December 31, 2008.  The main factors that contributed to thedecrease in working capital were the classification of $102.3 million of bankloans as current liabilities as described in Note 8 to the financial statementsand the decrease in cash and cash equivalents during the quarter. OEH’s workingcapital position was subsequently improved by $141.3 million from the Company’sshare offering which was completed on May 4, 2009.

 

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*Cash Flow*

 

*Operating Activities*.  Net cash used in operating activitiesincreased by $9.7 million from $1.0 million for the three months ended March 31,2008 to $10.7 million for the three months ended March 31, 2009. Thedecrease was due to worse performance of the continuing hotels in the firstquarter of 2009.

 

*Investing Activities*.  Cash used in investing activities decreasedby $3.8 million to $22.1 million for the three months ended March 31,2009, compared to $25.9 million for the three months ended March 31, 2008.

 

The 2008 first quarter included acquisitions of $2.1million in respect of the 20% minority interest in Casa de Sierra Nevada, andthe La Samanna spa acquisition.  Therewere no acquisitions in the first quarter of 2009.

 

The increase in restricted cash in the first quarterof 2009 was lower than the increase in the same quarter last year by $2.6million. This mainly represented movements in Porto Cupecoy escrow account.

 

Capital expenditure of $22.0 million included $3.1million of Hotel Cipriani refurbishment, $2.9 million of Hotel das Cataratascapital costs, $2.5 million of Copacabana Palace Hotel refurbishment, $1.6million of El Encanto construction costs, $1.5 million of Grand Hotel Europerefurbishment and $1.4 million on construction of assets at Porto Cupecoy inSt. Martin.

 

*Financing Activities*.  Cash provided by financing activities for thethree months ended March 31, 2009 was $9.2 million compared to $32.4million for the three months ended March 31, 2008, a decrease of $23.2million.  The main factors thatcontributed to this decrease were lower revolving credit facility drawdowns inthe first quarter of 2009.

 

*Capital Commitments*.  There were $70.2 million of capitalcommitments outstanding as of March 31, 2009 of which $18.2 millionrelates to investments in owned hotels and $52.0 million to the purchase ofland and a building adjoining ‘21’ Club, New York. OEH is negotiating adeferral or restructuring of this purchase.

 

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*Indebtedness*

 

At March 31, 2009, OEH had $843.8 million oflong-term debt secured by assets, including the current portion, which isrepayable over periods of 1 to 11 years with a weighted average maturity of 3.1years and a weighted average interest rate of 4.19%**.**  See Note 8 to the financial statementsregarding the maturity of long-term debt.

 

Approximately 47% of the outstanding principal wasdrawn in European euros and the balance primarily in U.S. dollars.  At March 31, 2009, 60% of borrowings ofOEH were in floating interest rates.

 

*Liquidity*

 

During the nine months ending December 31, 2009,OEH has approximately $38.6 million of scheduled debt repayments, excludingamounts relating to revolving working capital facilities, which it expects tomeet through operating cash flow, other available committed facilities and the May 2009share sale proceeds, and excluding $3.0 million of debt at Keswick Hall whichcomes due when the relevant building lots are sold.  Additionally, OEH’scapital commitments amount to $70.2 million of which $52.0 million relates tothe purchase of land and a building adjoining ‘21’ Club from the New YorkPublic Library.  OEH is discussing with the Library to secure and spreadfuture payments on this purchase over the next 24 to 30 months, although OEHcan give no assurance an acceptable final settlement will be reached with theLibrary. The balance of $18.2 million of capital commitments is currentlycovered by committed funding and projected operating cash flows.  OEHexpects to incur costs of a further $25.1 million to complete construction ofits Porto Cupecoy development, funded by a short-term loan agreed with a banklender in April 2009.

 

On May 4, 2009, OEH completed a public offering throughunderwriters in the United States of 25,875,000 newly issued class A commonshares including 3,375,000 shares covered by the underwriters’ over-allotmentoption in the offering which was exercised in full. OEH intends to use the netproceeds from the offering, approximately $141.3 million, primarily for debtreduction and general corporate purposes. Accordingly, OEH expects to haveavailable cash to fund its working capital requirements, capital expenditureand debt service for the foreseeable future.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a financialcovenant breach in its existing loan facilities if weak trading conditions leadto a deterioration of OEH’s results and the costs of implementing 

 

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remedial stepsreduce OEH’s earnings in any given period.  If current economicconditions, including the volatility recently experienced in foreign exchangeand global debt markets, continue or worsen, OEH believes there is heightenedrisk that it could breach certain financial covenants applicable to OEH during2009.

 

OEH’sliquidity would be adversely affected if a covenant breach occurred in amaterial loan facility and OEH were unable to agree with its bankers how theparticular financial covenant should be amended or how the breach could becured.  OEH expects to take pro-active steps to meet with its bankers toseek an amendment to any specific financial covenant if OEH believed that itwas likely that the covenant would be breached because of adverse tradingconditions or incurrence of additional costs.  OEH can give no assurancethat OEH’s loan facility lenders would agree to modify any affected covenant,which could impact OEH’s ability to fund its cash requirements for workingcapital, commitments and debt service and could cause an event of default underany affected loan facility.

 

At March 31,2009, OEH was in compliance with all major covenants except as noted below.

 

As disclosedin the Company’s Form 10-K annual report, OEH was concerned that it couldviolate a minimum $600 million tangible net worth covenant in two long-termdebt facilities at the end of its first quarter of 2009. Approximately $102.3million had been borrowed under these facilities at March 31, 2009 whentangible net worth calculated under the covenants was approximately$586 million. The Company has been negotiating with the bank lendersand has obtained agreement in principle to a waiver of these net worthcovenants. OEH expects that it will be required to repay $9.7 million in June 2009in connection with the waiver. No assurance can be given that the Company willbe successful in completing these negotiations.

 

Also as disclosed in the Company’s Form 10-Kannual report, Hotel Ritz, Madrid, in which OEH has a 50% interest, was out ofcompliance with a debt service coverage ratio in its first mortgage loanfacility which is non-recourse to and not credit-supported by OEH or its jointventure partner in the hotel.  OEH andits partner continue to service the debt and to negotiate with the lender todetermine how to bring the hotel back into compliance. Noassurance can be given that these negotiations will be successful.

 

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**Recent Accounting Pronouncements**

 

As of March 31, 2009, OEH had adopted SFAS No. 160,SFAS No. 161, SFAS No. 141(R), FSP 142-3, and SFAS No. 157 fornonfinancial assets and liabilities, as reported in Note 1(a) to thefinancial statements.

 

In addition, OEH is considering FSP 157-4, “Determiningthe Fair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly”,which was issued in April 2009. FSP 157-4 provides additional guidance forestimating fair value in the circumstances indicated and is effective forinterim and annual reporting periods ending after June 15, 2009. OEH doesnot expect a significant impact from implementation of this FSP.

 

In April 2009, the FASB issued FSP 107-1 and APB28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSPamends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”,to require disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements. This FSP also amends APB Opinion No. 28, “Interim FinancialReporting”, to require certain disclosures in summarized financial informationat interim reporting periods. This standard will be effective for OEH’s fiscalquarter ended June 30, 2009. OEH is in the process of determining theeffects of the adoption of this standard on its consolidated financialstatement disclosures.

 

## **CriticalAccounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2008 Form 10-Kannual report.

 

**ITEM 3.****                                 ****Quantitativeand Qualitative Disclosures about Market Risk**

 

OEH is exposed to market risk from changes in interestrates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall riskmanagement program, which recognizes the unpredictability of financial marketsand seeks to mitigate material adverse effects on consolidated earnings andcash flows.  OEH does not hold marketrate sensitive financial instruments for trading purposes.

 

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changesin interest rates on borrowings, principally based on U.S. dollar LIBOR andEURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables heldconstant, annual net finance costs of OEH would have increased by approximately$1,900,000 on an annual basis based on borrowings at March 31, 2009. Theinterest rates on substantially all of OEH’s long-term debt are adjustedregularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.

 

The market risk relating to foreign currencies and itseffects have not changed materially during the first three months of 2009 fromthose described in the Company’s 2008 Form 10-K annual report.

 

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**ITEM 4.****                                 ****Controlsand Procedures**

 

The Company’s management, under the supervision and with theparticipation of its chief executive and financial officers, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of March 31, 2009 and, based on thatevaluation, believes those disclosure controls and procedures are effective asof that date.  There have been no changesin the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f))during the first quarter of 2009 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about the likelihoodof future events.  Controls may becomeinadequate because of changes in conditions, or the degree of compliance withpolicies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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** **

**PART II - OTHER INFORMATION**

** **

# **ITEM 6.           Exhibits**

# ** **

The index toexhibits appears below, on the page immediately following the signature page tothis report.

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | ORIENT-EXPRESS  HOTELS LTD. |
|--------|-----------------------------|
|   |                        |
|   |                        |   |
|   | By:                         | /s/  Martin O’Grady |
|   |                        | Martin O’Grady |
|   |                        | Vice President - Finance |
|   |                        | and Chief Financial Officer |
|   |                        | (Principal Accounting Officer) |

 

 

Dated: May 8,2009

 

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# ** **

# **EXHIBIT INDEX**

# ** **

3.1     –     Memorandumof Association and Certificate of Incorporation of the Company, filed as Exhibit 3.1to the Company’s Form 8-K Current Report on July 9, 2007 andincorporated herein by reference.

 

3.2     –     Bye-Lawsof the Company, filed as Exhibit 3.2 to the Company’s Form 8-KCurrent Report on June 15, 2007 and incorporated herein by reference.

 

3.3     –     RightsAgreement dated as of June 1, 2000, and amended and restated as of April 12,2007, between the Company and Computershare Trust Company, N.A., as rightsagent, filed as Exhibit 1 to Amendment No. 1 to the Company’sRegistration Statement on Form 8-A dated April 23, 2007, for theCompany’s preferred share purchase rights, and incorporated herein byreference.

 

3.4     –     AmendmentNo. 1 dated December 10, 2007 to amended and restated RightsAgreement (Exhibit 3.3), filed as Exhibit 4.2 to the Company’s Form 8-KCurrent Report on December 10, 2007 and incorporated herein by reference

 

31      –     Rule 13a-14(a)/15d-14(a) Certifications.

 

32      –     Section 1350Certification.

 

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